An ECB Rate Cut: What the Banks Think

The euro’s exchange rate has been supported of late by swelling expectations of easing from the European Central Bank at its monthly monetary policy announcement, coming later Thursday.

This isn’t a typical reaction to easing, but the market is keen to see the central bank get ahead of drab growth.

The economic picture is grim and some say it’s not enough for the ECB to just cut rates; more action is needed to free up bank lending, particularly to small firms. All eyes will be on Mario Draghi‘s press conference, which kicks off at 1230 GMT, for clues on what measures could be announced.

Here is a rundown of some key banks’ views.

GOLDMAN SACHS: Expects a 25 basis point cut in the main refinancing rate. “Following disappointing economic data for ‘core’ countries (the German Ifo and PMIs, as well as the French INSEE) last week, we think the conditions set out by the ECB for a further easing in rates have now been fulfilled,” the bank says. Adds it’s too “premature” to expect other announcements such as steps to make it easier for banks to refinance small and medium enterprise loans via the central bank

BARCLAYS: The ECB is set to cut the main refinancing rate by 25 bps and keep the deposit rate steady at zero. The ECB could also consider easing collateral rules to facilitate lending to credit-constrained, small- and medium-sized businesses. “In the absence of any indications that it would be considering further, more aggressive measures or signals that the state of the economy as perceived by the ECB is worse than what market participants already know, we would expect the euro sell-offs to be rather shallow,” the world’s third largest currencies dealing bank says.

UNICREDIT: One of the few banks calling for the ECB to stay on hold Thursday and instead wait until June to cut. “But this is a very close call,” the bank says, adding the risk of a cut is high. In terms of market reaction, the euro should strengthen against the dollar if the ECB stays on hold, as UniCredit expects.

MORGAN STANLEY: Weak data will push the ECB towards action Thursday, the bank says, as it forecasts a 25 bps cut in the refi rate. “While data had started to improve, particularly in the first two months of the year, we have seen a marked deterioration since then, with even forward-looking indicators in the core underperforming,” the bank says. It adds even if the ECB does cut, as expected, it’s unlikely to have a lasting impact on the euro, as it probably won’t filter through into the government bond market. “However, as fundamentals weaken and Japanese investors fail to reallocate into euro to the extent we had expected, (the) euro could come under pressure,” the ninth-largest FX dealing bank says.

J.P. MORGAN: As the euro-area economy continues to contract, pressure for a macroeconomic policy response is building, so it’s likely the ECB will lower the refinancing rate 25 bps later Thursday. The ECB will be under pressure to do more, in particular to improve the transmission mechanism, but it’s unlikely anything will be announced on this front yet, the bank says.

LLOYDS: The bank looks at the different scenarios for how the euro will react to the decision, given a cut of 25 basis points is already largely priced into the single currency. “The euro is now more likely to weaken significantly if the ECB don’t cut the refi rate, as credit markets will see that as a disappointment,” the bank says. It notes if the ECB does cut, as expected, the market reaction depends on whether additional measures will be announced, or signalled further down the line. “In this respect, we do not expect Draghi to be as dovish as the market expects (he will probably be just dovish enough to justify a rate cut and reiterate that the policy stance will remain accommodative for as long as necessary).”

CREDIT SUISSE: There’s a strong possibility the ECB will cut its main policy rate later Thursday by 25 basis points, while keeping the deposit rate unchanged. “Only delivering a rate cut would disappoint: non-standard measures to aid SME funding are a possibility, but the ECB may not have done the necessary homework to announce this on Thursday,” the Swiss bank says.

ROYAL BANK OF CANADA: Bucking the trend, this bank is not expecting a rate cut Thursday. “In our view, while the disappointing recent euro area indicators warrant a further easing in monetary conditions, a refi rate cut would have little impact and so is not the obvious answer,” the bank says. In any case, such a move would deliver only limited and uncertain benefits. “We think that the Governing Council will push measures to ‘repair the transmission mechanism’, probably focusing on lending to SMEs by easing the pressure on commercial banks to delever,” economists at the bank say.

CITIGROUP: The euro’s reaction to the ECB will depend on the type of measures announced Thursday, and how aggressive they are. “Too aggressive easing plans or signals of further aggressive easing combined with lack of detailed plans for a SME lending support could weigh on euro,” says currencies analyst Valentin Marinov. In contrast, the euro could be supported if the ECB delivers a cut and unveils concrete proposals to stimulate the lending channel, Mr. Marinov says.